HSA vs. FSA: How to Choose the Best Healthcare Account

Barri Segal

1 year ago

sattahipbeach / Shutterstock.com

Health savings accounts and flexible spending accounts are two great ways to cover the cost of healthcare. Both flex spending and HSA plans can be used to pay for expenses such as deductibles and copays, as well as other expenses. Depending on your plan, you will get either a debit card to pay for your expenses, or you will need to submit documentation for reimbursement.

Read on to learn about the pros and cons of these accounts. You can’t contribute to an FSA and an HSA simultaneously. So, when it’s time for open enrollment, you need to choose the medical savings account that will best help you survive rising healthcare costs.

Flexible Spending Account Basics

A flexible spending account allows you to save money on out-of-pocket healthcare costs. Money can be contributed to flex spending accounts on a pre-tax basis and withdrawn tax-free for qualified medical expenses.

With an FSA, you can have up to $2,600 taken out of your paycheck on a pretax basis to pay for medical expenses for yourself, your spouse or your dependents over the course of a year. A limited purpose FSA is like a regular FSA, but it limits your spending to dental and vision costs.

Employees can contribute to their own FSA accounts, but the IRS also allows employers to make contributions on a worker’s behalf. If you contribute to an FSA during the year and don’t use all of the money in the account by the end of the plan year, you have to forfeit any remaining balance. In the past, this was a major deterrent to enrolling in an FSA plan.

The IRS now allows companies to choose one of two types of grace periods. The first type of grace period gives you extra time — up to two months and 15 days after the end of your plan year — to use your remaining funds from the previous year.

The second type of grace period allows employees to roll over up to $500 of the remaining balance in the account. This money can be used in the following plan year to pay for medical expenses.

Employers are allowed to offer one of these two options, but not both. In addition, employers are not required to offer either option.

FSA Pros and Cons

If you or a family member has an ongoing medical condition — and you’re expecting high medical bills for the year — an FSA might be a good choice. If you’re young, healthy and have decent benefits, however, it’s likely your out-of-pocket expenses for medical care will be low. In that case, an FSA might not be for you.

Weigh the pros and cons of an FSA before deciding whether to enroll.

FSA Pros

Contributions are based on pretax money, so your taxable income will be lower.

You can save for medical expenses you think you might have during the year.

The full annual contribution amount is available to use immediately.

You can use the account to pay for out-of-network providers and alternative healthcare.

Money is taken directly out of your paycheck, making it easy and convenient to save.

Health Savings Account Basics

Health savings accounts are tax-friendly savings accounts that are paired with high-deductible health insurance plans. Participants can make tax-deductible contributions to their HSA that grow tax-free, and that can be withdrawn tax-free when used to pay for qualified medical expenses.

An HSA plan allows you to save up to $3,400 a year for an individual — or $6,750 for a family — to pay for medical expenses. Funds are tax-deductible and can be withdrawn tax-free for qualified medical expenses. Unlike an FSA, any money you use during a plan year can be rolled over. You can even use the funds after you retire.

However, unlike an FSA, HSAs require you to have a high-deductible health plan. For 2017, that means you must have a deductible of at least $1,300 if you are an individual or $2,600 for HSAs tied to families. That high deductible means it’s important to know which costs your health insurance plan will cover — and which costs it won’t — before enrolling in an HSA.

Employees can contribute to their own HSA accounts, but the IRS also allows employers to make contributions on a worker’s behalf.

HSA Pros and Cons

An HSA is likely a good choice if you don’t have major health problems — you can save money by staying healthy and use unspent funds to pay for healthcare in the future. Remember, your savings keep rolling over indefinitely, which is great if you want to make retirement savings last.

However, if you expect high medical care costs in the coming year, the requirement to have a high-deductible health plan means an HSA might not be the best choice.

Weigh the pros and cons of an HSA before deciding whether to enroll.

HSA Pros

Contribution limits are higher than for FSAs.

You don’t need to guess in advance what your medical expenses will be for the following year.

You keep the account if you change jobs.

Any balance rolls over indefinitely.

The money you contribute is tax-deductible, grows tax-deferred and can be withdrawn tax-free for qualified medical expenses.

HSA Cons

You must carry a high-deductible health plan to qualify for an HSA.

It’s probably not the best choice for people with chronic or expensive medical conditions.

It can be tough to find the savings to contribute the maximum amount to your HSA.

You might not seek necessary healthcare because you want to save your HSA money, or avoid paying a high deductible.

You must pay taxes on any money you take out of your HSA for nonmedical expenses.

Choose Wisely

To determine which plan is best for you, do the math. If you have an HSA, remember that a high-deductible healthcare plan typically offers lower premiums, but comes with copayments, coinsurance and out-of-pocket limits. And if you have an FSA and don’t spend the full amount, eventually you’ll have to forfeit any unused balance.

Both plans include a lot of fine print, so make sure you read plan documents. If you still have questions, talk to someone in your human resources or benefits department.